Rocket Stock or Dud?

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a rocket stock just before it takes a nosedive.

Now I readily admit that sometimes, stocks rise for a reason. But sometimes, the rise becomes the reason. No matter how often we caution them not to, investors do have a habit of buying "hot" stocks, and trusting momentum to keep 'em moving upward.

Problem is, if the price goes up too much, even a great company can turn into a lousy investment. Below I list a few stocks that may have done just that. Stocks that, according to the smart folks at finviz.com, have more than doubled over the past year, and just might be ripe to fall back to Earth.

Companies are selected by screening for 100% and higher price appreciation over the last 12 months on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Since the darkest days of early 2009, a change has come over the markets. People are starting to talk more about an economic recovery and less about the end of civilization as we know it. The Institute of Supply Management reports that manufacturing activity grew in March. And once you ex-out weakness from civilian aircraft makers like Boeing (NYSE: BA), which dragged on results, the Commerce Department's report on durable-goods orders for March tells a similar story of rising demand for industrial manufacturers.

So it's little wonder that the table above contains an industrial manufacturer (Caterpillar) and a company that supplies raw materials (Teck). America's industrial revival looks to be in full swing, and investors are piling into the companies powering the resurgence.

What is surprising, though, is that the one stock Fools prefer above all others is not located here in the U.S., but in India.

The bull case for Tata Motors
Why do Fools prefer Tata over America? CAPS member rlich8 pulls no punches in explaining his preference:

Solid management---not like these knuckleheads in Michigan. They are the leader in all commercial vehicle segments in India, within the top 3 in passenger cars. ... Good, slick products. Reasonably priced. Attractive and competitive. Robust trucks, cool hip city cars.

As 1Ed1 tells us, Tata:

recently returned to profitability. Has a very interesting combination of ultra low end auto segment (Tata) and established brand high end segment (Jaguar, Land Rover). TTM doesn't need to compete in the very crowded mid end segment of the auto market. World economy is slowly improving, TTM earnings should improve over several years.

And let's not ignore the obvious. CAPS member blaine567 reminds us that "India's economy is growing and more people will be able to afford cars. TTM is poised to sell affordable cars in India. If TTM plays it smart they will eventually export cars to the rest of the world (think Hundai and Kia). There is a lot of upside potential for TTM."

Little cars, big growth
Tata could begin realizing that potential real soon. As fellow Fool John Rosevear described last week, Tata is just days away from opening its first factory devoted to producing the "Nano," set to be the world's cheapest car, at $2,500 a pop. Tata's already booked 100,000 advance orders, and its new plant should be capable of producing as many as a quarter-million Nano buggies annually.

Turning our eyes next to the numbers, we find Tata selling for less than 0.6 times its annual sales. This seems a high price to pay when you consider that a resurgent Ford (NYSE: F) fetches only a 0.4-times ratio on its sales. Then again, troubled Toyota (NYSE: TM) sells for 0.66 times sales, while Honda (NYSE: HMC) fetches a 0.72 multiple.

So maybe 0.6 isn't so much to pay after all, especially when you consider the growth rates.

Analysts who track Tata predict it will grow sales 150% over the next three years (and its profits nearly as fast). Ford's only expected to be collecting 25% more revenue in 2012 than it booked in 2009, while Toyota and Honda seem stuck in neutral, projected to have flat revenues over the next three years.

Foolish takeaway
Given a choice between slow-growth Ford, no-growth Toyota and Honda, or multibagger growth at Tata, CAPS members are making the logical choice -- and following the money.

As for me, I'm still a little leery of Tata's lack of free cash flow, so I won't be joining the parade just yet. Then again, if its new Nano factory frees Tata from the need to make similar capital spending in years to come, while the Nano generates beaucoup revenue, I may well revisit the stock when it becomes a little easier to value.

What say you? Tata Motors: Up or down?